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    Additional funds needed and percentage of sales method

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    Balance Sheet as of 12-31-2004
    (Thousands of Dollars)


    Cash $ 1,080
    Receivables 6,480
    Inventories 9,000
    Total current assets $ 16,560
    Net fixed assets 12,600
    Total assets $29,160


    Accounts payable $ 4,320
    Accruals 2,880
    Notes payable 2,100
    Total current liabilities $ 9,300
    Mortgage bonds 3,500
    Common stock 3,500
    Retained earnings 12,860
    Total current liabilities and equity $29,160

    Income Statement for 12-31-2004
    (Thousands of Dollars)

    Sales $36,000
    Operating costs 32,440
    Earnings before interest and taxes $ 3,560
    Interest 460
    Earnings before taxes $ 3,100
    Taxes (40%) 1,240
    Net income 1,860
    Dividends (45%) $ 837
    Addition to retained earnings $ 1,023

    Suppose 2005 sales are projected to increase by 15 percent over 2004 sales. What additional funds are needed. The company is operting at full capacity in 2004, it cannot sell any of its fixed assets, and any required financing will be borrowed as notes payable. Assets, spontaneous liabilities, and operting costs are expected to increase by the same percentage as sales.

    Use the percent of sales method to develop a pro forma balance sheet and income statement for 12-31-05. Use an interest rate of 10 percent on the balance of debt at the beginning of the year to compute interest (cash pays no interest). Use the pro forma income statement to determine the addition to retained earnings.

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    Solution Preview

    Please see the attached file for the calculations. The beginning assets are 29,160. The assets are also expected to increase at the same rate as the increase in sales. The assets at en d2005 would be 15% higher or 33,534. The increase in ...

    Solution Summary

    The solution explains how to calculate the additional funds needed given the increase in sales and the preparation of a proforma balance sheet using the percentage of sales method.